Market West Struggles Continue As Philly Leads Nation In Office Distress

The east end of Market Street has generated a lot of hand-wringing in recent years, but many office properties on the west side of the Center City corridor aren't doing great either.

Morningstar tracked extensive office distress across a series of CMBS-backed Market West skyscrapers in its latest “Boots on the Ground” report published Wednesday.

“It’s hard to find a property that doesn’t have some sort of problem with it,” Morningstar Associate Managing Director David Putro said.

“That knight in shining armor is not coming in Philly to take 45K SF floor plates,” he added.

Across the Philly metro area, 34% of CMBS office loans were classified as distressed as of January, according to a separate report released this week by Kroll Bond Rating Agency. That was the highest distress rate of the 20-largest metro areas on the list, a group that averaged 13.8% office distress. 

"No office market is doing exceptionally well at this point,” Morningstar Credit Vice President Sarah Helwig said. "I think, for how much there is, I would say [Philadelphia] is disproportionately affected than most other markets.” 

The Morningstar report chronicles Philly's office distress from west to east because the situations tend to get more intense the closer a building is to City Hall, Putro said.

The city's largest office building, 1500 Market St., was one of the report's prime examples of distress. 

The complex, also known as Centre Square, sold to Dean Adler and PMC Property Group for about $94M earlier this year, less than a third of what Nightingale Properties bought it for in 2017. The new owners are now plotting a partial residential and hotel conversion.

Putro hopes that sale price will represent a “floor” for future distressed Center City office transactions. 

He predicts that Shorenstein Properties’ 1700 Market St. could be the next big domino to fall.

“1700 has already been marketed for a while, and now you have a sale comp two blocks away,” Putro said. “That’s probably one of the next bigger properties to either sell or be worked out.”

The report says the lobbies in that building and another Shorenstein property at 1818 Market, which have both been in special servicing since 2023, appear to be in relatively good shape.

But both buildings are struggling with occupancy, with 1700 at 72% and 1818 at 69%. They were underwritten at 88% and 86%, respectively.

Morningstar is also tracking an ongoing foreclosure at One South Broad. Occupancy there sits at 59%, which was up in recent years but still far below the 88% at which it was underwritten.

Putro said a receiver is already in place and that the owner, Aion Partners, isn't contesting the process.

While he expects they will ultimately hand over the keys, he doesn’t know if it will be an “ugly foreclosure” or if a new owner might come in and buy the property before it gets to that point.

Putro also highlighted Accesso Partners’ 1515 Market St., which secured a two-year loan extension in September and new funding for renovations.

The company characterized the workout as a “vote of confidence” in its repositioning strategy, but Putro said the outlook is still “dubious,” with anchor tenant Temple University set to leave when its lease expires next year. 

There were a few rays of optimism in Morningstar’s report.

It had a positive take on 2400 Market St., a mixed-use conversion of a nearly century-old warehouse delivered in 2019.

While there is some uncertainty about the future of its second-largest tenant, Audacy, Morningstar reported that the Fitler Club gym and coworking space were busy and that the building is fully occupied with a strong cash flow.

The firm found that 1735 Market St., which has a direct connection to Suburban Station, was in the second-best condition after 2400 and that its 84% occupancy was just 30 basis points below what it was underwritten for.

The Widener Building at 1 S. Penn Square didn’t make it into Morningstar's latest Boots on the Ground report, even though it was in the 2023 edition. The outlook was good at the time after the property emerged from special servicing. 

The loan is still performing well, according to Morningstar’s database. The Philadelphia Municipal Authority and First Judicial District occupy about 70% of the building via leases that don’t expire until 2032, which Putro saw as a positive.

“That paid off and got refinanced into a new CMBS deal,” he said.